The relation between gold and stocks: an analysis of severe bear markets

Abstract

No  prior research has (1) studied the relation between gold and stocks for the four severe bear markets since 1960s, (2) used different segments of stock markets simultaneously for analysis and (3) implemented a system of equations to control for exogenous and endogenous variables to investigate the role of gold for investments hedge in these severe bear market periods, and compare the results with its role in nonbear market periods. Results show that gold was a good instrument for hedging stock market risk for only two of the four severe bear market periods analysed. For nonbear market periods, except for small-cap stocks, gold also did not offer good risk hedging. The findings are of interest, as it coincides with the fact that small-cap stocks are the riskiest and most volatile investment even during economic good times, and gold is found to offer a risk-hedging power for this segment of the stock market.

Keywords:

• gold
• bear markets
• risk hedging
• stock market

JEL Classification:

• G10
• N22
• N20

Notes

¹ The exception is for the bear market from 25 August 1987 to 19 October 1987. Due to the limited number of observations for this bear market, M is set equal to 1 and L is set equal to 0 to allow the VAR to converge during the estimation process.